Ernst and Young: Cleantech Investment Skyrockets In Q2

U.S.venture capital investment in cleantech companies in Q2 2009 reached$572 million, an increase of 73% in terms of capital, with 48 financingrounds, a 100% increase in number of transactions compared to Q1 2009,according to an Ernst & Young analysis based on data from Dow JonesVentureSource.

Compared to Q2 08, the second-highest quarter for cleantechinvestment on record, the Q2 09 results were 59% and 16% below thoserecord levels in terms of capital and number of transactions,respectively.

VC investment in cleantech in Q2 09 was lead by theEnergy/Electricity Generation category, which raised $157 million, aquarterly increase of 181% as compared to Q1 09. Within this category,solar deals received the lion’s share of capital, more than trebling to$148 million compared to the prior quarter. Deal activity in the solarsegment represented 26% of all quarterly cleantech investment by VCfirms. The solar results were driven by deals such as the $25 million,first round investment in Skyline Solar, based in Mountain View, CA,which was led by New Enterprise Associates.

The Energy Efficiency category grew 168% from Q1 09 to $152 milliondue to power and efficiency management service deals that accounted forthe majority of investment. This segment experienced 143% growthduring Q2 09, attracting $93 million. A notable deal in this segmentwas the $30 million investment in the residential smart grid companyTendril headquartered in Boulder, CO. This investment was led byVantagePoint Venture Partners and has since followed with a partnershipwith GE to enable smart appliances to communicate over metering andbroadband networks.

The demand for environmentally-friendly transportation optionsencouraged investment in the Alternative Fuels category to $53 millionin Q2 09, driven by the $40 million later stage round investment inGevo, a biofuels company based in Englewood, CO. Additionally, theTransportation sector received a $65 million investment in Q2 09. Themajority of this funding came from Daimler AG’s $50 million investmentin Tesla Motors in San Carlos, CA.

“The quarterly uptick reflects investor confidence in the ability ofcleantech companies to capitalize on market opportunities,” says JosephA. Muscat, Ernst & Young LLP, Americas Director of Cleantech.“While enacted and anticipated government actions have helped bolsterconfidence and catalyze new capital, we believe that leading cleantechcompanies will be defined by their ability to execute on business plansand advance their technologies through commercialization anddistribution despite the challenging economy.”

The Investor Mix

Quarterly VC investment in cleantech exhibits a shift from companiesin the product development stage toward companies in the start-up andshipping product stages. Start-up cleantech companies received 8% offinancing rounds in Q2 09 compared to none in Q1 09. Companies at theshipping product stage accounted for 65% of financing rounds comparedto 54% in the prior quarter. By contrast, product development stagecompanies received just 27% of financing rounds compared to 46% lastquarter.

Q2 09 results also illustrate the continued mix of investors who arepartnering to advance the US cleantech market. Seven of the top 10cleantech venture deals included participation by private equity, hedgefund or corporate investors. For example, the $54 million investment inPowerspan Corp., a carbon dioxide capture technology company inPortsmouth, NH, was made by a syndicate of investors that included VCfirms, private equity firms, corporate investors and a hedge fund.

Cleantech Investments In Other Asset Classes Also Rise

The rebound in VC investment in cleantech was accompanied by a risein private equity and asset backed financings. New Energy Finance(NEF) tracked $240 million in clean energy private equity investments,a rise of 12%. This figure includes the $69 million round secured bythe battery manufacturer A123 in Watertown, MA, and the $50 millioninvestment in Spectrawatt, a solar cell manufacturer in Hillsboro, OR.

Clean energy asset financings grew significantly according to NEF,increasing from $307 million in Q1 09 to $2.9 billion in Q2 09. Windwas the primary driver of asset backed financing activity, with dealssuch as the $504 million financing secured by First Wind for a 203.5 MWproject. Solar projects were also supported. SunPower Corporationobtained an undisclosed amount of project financing for its 1.1MW PVproject located in Merced, CA from Wells Fargo.

Additionally, there were 12 US M&A transactions of which threehad disclosed values totaling $157 million, according to JS Herold. Sixof the deals include alternative fuel companies.

Government Support

Government support continues to influence the growth of the UScleantech market. For example, the United States Department of Energy(DOE) released more than $47 million from the American Recovery andReinvestment Act (ARRA) of 2009 to accelerate the completion of eightsmart grid demonstration projects in seven states.

At the state level, the state of Michigan is providing GE with $74million in tax incentives in light of the company’s plan to build a$100 million advanced-manufacturing center to develop renewable-energytechnologies near Detroit. Prospectively, the Department of Treasury’sguidance released in July for accessing grants in lieu of theinvestment tax credits for qualified energy property, as authorized byARRA, was another positive step for the cleantech market, particularlyas the DOE begins to review applications in August and makes paymentswithin 60 days after receipt of qualified applications.

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